Rising health care costs, coupled with generous health
coverage for employees, threaten to eat up a recently approved $262 million
increase in public school funding, according to school officials, legislators
and health care experts.

"One thing that we are sure everyone agrees with is that
health care cost increases have far exceeded school districts’ ability to pay
without cutting essential services to students," said Kevin O’Neill,
superintendent of the Coopersville Area Public Schools and president of the
Ottawa Area School Superintendents Association, in testimony before state Senate
committees last August.

School districts across the state, whether as part of
contract negotiations or in forming their own insurance pools, have begun
looking for alternatives to the health insurance plan preferred by the Michigan
Education Association through the Michigan Educational Special Services
Association.

Critics say that MESSA drives up costs by charging excessive
rates and serves as a funding conduit to the MEA, which pushes for MESSA
coverage in contract negotiations. A 1993 Mackinac Center for Public Policy
study concluded that MESSA imposed excessive administrative fees on school
districts and showed how MEA used MESSA resources to augment the union’s
organizational strength and political power.

"In a number of districts, the fuel gauge is on empty,"
O’Neill added. "The much welcomed, anticipated state aid increase of $175 per
pupil is not even covering the increase in our retirement rates and the
double-digit health care expense increase."

The hearing was prompted in part by the findings of a
Senate-commissioned study to determine whether health insurance coverage for
public school employees could be managed in a more cost-effective manner. The
study, released in July by the Virginia-based consulting firm Hay Group,
estimated that the total medical care cost for more than 190,000 school district
employees and their dependents will be $2.2 billion in the 2005-2006 school
year. The study found that dental and vision benefits will likely cost an
additional $150 million.

According to the Hay Group study, three fourths of school
districts, with 53 percent of all public school district employees, obtain their
health insurance through MESSA.

This issue is not confined to one part of the state. It is
part of contract negotiations at districts large and small, urban and rural, as
school boards struggle to bring health insurance costs under control.

LAKEVIEW

Lakeview Public Schools in August implemented a contract
proposal for teachers that provided a 3.5 percent pay increase coupled with a
shift from MESSA coverage to premium Blue Cross/Blue Shield PPO insurance. The
board took this action when it reached an impasse with the Lakeview Education
Association over MESSA insurance, according to Superintendent Sandra Feeley
Myrand.

The switch is projected to save up to $500,000, allowing the
school board to avoid layoffs, provide teachers with a pay raise and still
maintain "outstanding health care" coverage for employees, Feeley Myrand said.

While she is grateful for the $175-per-pupil increase
provided by the state, Feeley Myrand said it cost the district more than that
just to meet obligations in the new teachers’ contract. "We estimate that just
to pay for the raise, health care and retirement will cost $220 per student,"
she said. That means none of the extra spending makes it to the classroom.

In September, the union, which represents more than 180
teachers in the St. Clair Shores district, sued the Lakeview board for unfair
labor practices, the Macomb Daily reported. "We believe they are violating the
law and imposing a changed working condition without bargaining to an impasse,"
an attorney for MEA/NEA Local 1, told the Macomb Daily.

HOUGHTON LAKE

The Houghton Lake Board of Education, facing a $600,000
deficit, was warned by a CPA who reviewed the district’s financial report to
"take immediate action" to cut costs, according to The Houghton Lake Resorter.
Among his recommendations, which were delivered at a September special meeting,
was that the board seek quotes from Blue Cross/Blue Shield for comparable health
care benefits which, he said, "should reduce your cost from your current MESSA
contracts."

HESPERIA

In early October, the school board in Hesperia declared an
impasse in mediated contract negotiations with the teachers’ union and announced
it would require teachers to start paying 12 percent of their MESSA health care
premiums, The Muskegon Chronicle reported. Prior to that move, Hesperia teachers
did not pay any share of their premiums and medical deductibles were paid by the
district, the newspaper reported.

A survey conducted by Michigan School Business Officials in
May found that 84 percent of Michigan school districts modified their health
care plans during the previous year. The survey found that districts employed
different strategies to lower costs: 73 percent increased their co-pays or
deductibles, 70 percent shifted to a lower cost plan and 42 percent instituted
or negotiated premium sharing with employees.

After seven months of negotiations, the Holland board of
education chose a less expensive health insurance plan that will require
teachers to pay $199 a month toward their own coverage. The district had been
paying more than $15,300 per teacher annually for health care, but switched to a
less expensive plan costing about $13,000 per teacher per year.

Some of the school districts that recently moved from
traditional MESSA coverage to Choices II include Howell, Jackson, Niles,
Portage, Harbor Beach, Hartland, Forest Area Community Schools, Suttons Bay and
the Western School District.

In this fiscal climate, public school employees find
themselves making tradeoffs between health coverage and wage increases. A number
of teachers around the state appear willing to forgo the most costly and
extensive health care insurance options in favor of a pay raise.

JACKSON

In Jackson, the switch to a managed health care plan allowed
the school board to save about $200,000 annually, avoid a 15 percent to 17
percent insurance increase and approve a 2 percent raise for teachers, the
Jackson Citizen Patriot reported.

SHEPHERD

The Shepherd Public Schools school board is offering teachers
two options as they negotiate a new contract: Teachers can have MESSA Choices II
with no pay increase or accept a Blue Cross/Blue Shield PPO and receive a 2.95
percent pay raise.

PINCKNEY

The shift from MESSA to lower cost insurers could become a
trend, according to a report in Michigan Health Plan Analysis.
HealthLeaders-Interstudy, a healthcare business information company that
provides integrated data and analysis, analyzed five education groups in the
Pinckney Community School district – including three collective bargaining units
– that dropped their MESSA insurance for Care Choices HMO.

"It’s evident how MESSA is vulnerable to competitors when it
seeks 10 to 12 percent premium increases while the company that its network is
built upon, Blue Cross Blue Shield of Michigan, is trumpeting its smallest
increases in a decade—in the mid-single-digits in some segments," the report
concluded. "Insurers who can find that middle ground on price may be able to
compete for education groups, but they better come armed with quality data as
Care Choices did in Pinckney."

WEST MICHIGAN

The search for cost savings has some school districts banding
together for a solution. The school districts of Reeths-Puffer, Spring Lake,
Caledonia, East Grand Rapids, Northview, Rockford, South Haven, Kent
Intermediate School District and Ottawa Area Intermediate School District expect
to save thousands of dollars annually by switching health care coverage for
school administrators and non-union support staff, The Muskegon Chronicle
reported in September. These districts currently receive their coverage through
MESSA, but by forming the West Michigan Health Insurance Pool they hope to bring
in competitive alternatives.

The increasing cost of health care benefits for retired
school employees is also draining resources from the classroom, according to
findings from the Citizens Research Council of Michigan, a private, nonprofit
public affairs research organization that provides nonpartisan analysis of state
and local government organization and finance.

"Funding pension and health care benefits provided by the
Michigan Public School Employees Retirement System (MPSERS) will constitute an
increasing burden on state finances in coming years," the Council concluded in a
2004 report on Financing Michigan Retired Teacher Pension and Health Care
Benefits. "Combining increased costs for MPSERS contributions and health
benefits for working employees leaves little room for increased spending
elsewhere in school budgets …"

The magnitude of the problem has state legislators searching
for a solution. Senate Bill 896, introduced by Sen. Shirley Johnson, would allow
districts to pool resources, as was done in West Michigan, in purchasing health
insurance. In Oakland County, where Johnson lives, that could amount to a cost
reduction of $6 million to $8 million annually.

The Hay Group study also estimated that school districts will
pay an average of $11,362 for health insurance per employee, compared to $9,212
spent on state employees.

"The impact (of these higher costs) is devastating," said
Rep. Barb Vander Veen. "We absolutely need to do something. It has a definite
impact on the education of Michigan students. We’re seeing 12, 15, 18 percent
increases in a year’s time. … I would not hesitate to call it a crisis
situation."

Part of the answer is to provide school districts with more
health coverage choices, said Vander Veen, a member of the House Education
Committee. "[I]njecting competition will result in costs going down," she said.

Earlier this year, Vander Veen introduced a bill designed to
make it easier for school districts to secure competitive bids for employee
health insurance. Specifically, the legislation would require MESSA to disclose
to school districts an aggregated summary of health care services that were
actually used by the teachers for whom it administers health insurance.

Unlike most insurers, who provide claims data to their
clients, MESSA refuses to release the health claims histories of individual
school districts. Vander Veen’s bill would require MESSA to disclose this
information to allow potential alternative insurance administrators to estimate
the cost of providing health coverage and offer competitive bids.

Rising health care costs, combined with tight budgets, means
we are living in an era of limits, said Rick Murdock, executive director of the
Michigan Association of Health Plans. "As healthcare costs increase, both for
employees and retirees’ healthcare packages, it’s coming at the price of salary
increases for current staff, or instructional resources," Murdock told the
Michigan Health Plan Analysis. "It’s almost zero-sum. With a limited pool of
money, you’re either going to spend it on benefits or spend it on education."